Main Takeaway: Whether we get a soft or hard economic landing, there are steps multifamily owners and investors can take now to mitigate their downside including controlling expenses to optimize NOIs, and emphasizing tenant retention as vacancy rates tick up.
Story: We keep hearing about a forthcoming recession. Some believe it will be a deep recession, some a soft landing, and others a ‘slowcession’. So what’s the most likely outcome and how do multifamily owners and investors position themselves as we enter turbulent economic times?
Let’s take a closer look at the key issues.
Causes of Recession
Most recessions over the past 100 years were caused by the Fed increasing rates to slow inflation. According to many, this is the most likely cause of a forthcoming recession. There is a lot the Fed cannot control like supply chains, wages, supply and demand for markets like housing, among other factors.
What the Fed can control is monetary policy, which if tightened too much will lead to a much harder economic landing than anticipated. Although inflation is moderating, it is still high by historical standards so the coming months of CPI data will be highly informative when predicting the type of recession we are entering.
Predicting a Recession
The housing market in the U.S. is already in recession, according to the National Association of Home Builders (NAHB). According to their index, housing values are hitting record lows.
According to the Economist, a 2023 global recession is inevitable but one in the U.S. will be milder.
“America’s economy enters 2023 in fundamentally stronger shape than either China’s or any in Europe. The Federal Reserve’s aggressive rate increases will tip the economy into recession, but with the labour market still strong and household savings copious, it will be a mild one. Although high petrol prices have reinforced the inflation surge and hurt the Biden administration, the country is a big energy producer and has therefore benefitted from this year’s commodity shocks.”
Diane Swonk, chief economist at KPMG, notes that “The good news is we should be able to recover from it quickly. We do have good balance sheets, and you could get a response to lower rates once the Fed starts easing. Fed-induced recessions are not balance sheet recessions.”
If the Fed is satisfied with taming inflation and therefore ease interest rate hikes, then we may be in for a softer landing. If however, the Fed overshoots its rates hikes it could send the U.S. into a deeper recession.
Swonk agrees, “Seeing this hawkish Fed, it’s harder to argue for a soft landing, and I think that’s because the better things are, the more hawkish they have to be. It means a more active Fed.”
Ride it Out
No matter the type of recession we enter, there will be some pain for the multifamily sector. So how can multifamily owners and investors ride out the brewing economic storm?
Demand for rentals will increase as many face financial hardship amidst bleaker economic growth, higher interest rates, and stubbornly high housing prices. Further, reduced construction will limit the supply of rental housing, putting upward pressure on demand and prices.
According to Propmodo:
“Retaining tenants is more critical than ever during a downturn, so landlords will want to keep folks happy, which may mean paying more to maintain prized amenities. Other expenses to cut back that may not jeopardize resident satisfaction could be re-negotiating vendor contracts and deferring non-essential repairs and maintenance.”
Despite some good news, there are steps we can take to be proactive as we enter a recession. It’s critical that owners and operators get a handle on expenses to optimize for NOIs as cap rates increase. Further, tenant retention will be more important than ever as vacancy rates tick up in recessionary times.
Expert Take on a housing market recession 2023
During a recession, multifamily landlords may also want to provide incentives to high-quality tenants, such as discounted rates for signing long-term leases. There’s no one-size-fits-all answer to providing rent payment flexibility or offering incentives, so each owner’s strategy will differ. – Propmodo